Back in 2008, it seems like everyone from the Queen of England on down was blaming economists for not predicting the financial crisis. I seem to recall that Bob Lucas pointed out that economic theory explains why economists cannot predict financial crises, so our failure to do so was a feather in the cap of modern economic theory. I also seem to recall that lots of people rolled their eyes at his seemingly too clever excuse.
In the past I’ve argued that Lucas was exactly right, but in this post I’ll assume he was wrong. I’ll assume the EMH is wrong. Even in that case I’m going to argue the complaints were silly, just a bunch of crybabies.
So how do I respond to those people who are moaning that we didn’t warn them that a crisis was coming? One answer is that some economists, such as Nouriel Roubini, did issue warnings. But then the crybabies might respond, “But most economists didn’t warn us. How were we to know that he was the one to listen to? The economics profession as a whole should have issued a warning, so that it was unambiguously clear to the public that a financial crisis was coming.”
To summarize, a few economists did warn the public, so the crybabies’ lament only makes sense if you assume that these people wanted the profession as a whole to offer a clear credible warning to the public. Something that would be believed.
Were you the sort of person who believed in Santa Claus, and thought he would bring you a fairytale castle floating on a cloud, with unicorns prancing about in front? If not, why would you make such a patently unrealistic demand of the economics profession?
You wanted us to warn you that a big financial crisis was coming so that you could sell all your stocks before they went down? I ask this because a prediction of a severe financial crisis is implicitly also a prediction of a massive asset price collapse. So the people complaining that economists didn’t predict the financial crisis are (whether they know this or not) effectively complaining that economists didn’t warn them that their 401k plan was about to lose a few hundred thousand dollars.
Let’s suppose we have a time machine and economists from October 2008 can go back 6 months in time, to April 2008. They are told to warn the public that a massive financial crisis is coming in the fall. They warn the public that Lehman won’t be bailed out, and its failure will trigger a rush for liquidity and a Great Recession. What exactly would that warning have done, other than move those events up 6 months in time? Then the crybabies would have asked why we didn’t warn them in October 2007 (assuming they didn’t lynch the economists for causing the crash.)
And as for those stocks you were going to sell if economists had warned you of the crash—just who did you plan to sell them to? And at what price?
A better argument is that the economics profession didn’t warn the public that public policy was creating excessive lending, as Fannie and Freddie and FDIC and TBTF were creating moral hazard. In fact, I did warn people I met about this problem (but I completely failed to forecast the financial crisis.) Some other economists also warned about moral hazard, but not all. But no one wants to listen to a bunch of killjoy economists on public policy questions. It would be like blaming economists for tariffs, or rent controls.
When I explain to non-economist commenters what economic theory tells us about some public policy, they almost universally blow off my advice, unless it coincides with their pre-existing view on that particular public policy. No one cares what economists think, so don’t blame us for areas where we have no control. (Monetary policy is a different case; there the economics profession actually deserves far more blame than it’s gotten from the public.)
PS. I see that Trump threw a temper tantrum when his aides told him that Iran had been adhering to the nuclear agreement. We now have an administration with no ability to negotiate because no one trusts them to keep their word. The focus of his top aides is not dealing with foreign crises but rather managing unnecessary crises created by an out of control and mentally ill president. North Korea knows we’ll renege on any agreement we sign with them, and so a nuclear deterrent is their only option. Meanwhile they show their population images of Trump threatening to destroy their country.
Meanwhile Trump has abandoned the utilitarian approach of the Obama administration and the slaughter of innocent civilians has been skyrocketing:
Airwars reports that under Obama’s leadership, the fight against ISIS led to approximately 2,300 to 3,400 civilian deaths. Through the first seven months of the Trump administration, they estimate that coalition air strikes have killed between 2,800 and 4,500 civilians.
Trump seems like excellent black comedy to me, but unfortunately there are lots of dead women and children for whom he is no joke.
PPS: New Flash: Americans horrified to discover Hollywood producer behaving like a President of the United States. Hillary and Fox News particularly disgusted by this behavior.
PPPS: Another gem:
Speaking over the phone, Mr Reich said he asked his friend whether other Republican senators were preparing to follow Senator Bob Corker and “call it quits with Trump”.
His source told him: “Others are thinking about doing what Bob did. Sounding the alarm. They think Trump’s nuts. Unfit. Dangerous.” . . .
“Tillerson would leave tomorrow if he wasn’t so worried Trump would go nuclear, literally,” he added.
“Who knows what’s in his head? But I can tell you this. He’s not listening to anyone. Not a soul.
“He’s got the nuclear codes and, well, it scares the hell out of me. It’s starting to scare all of them. That’s really why Bob spoke up.”
Trump ran for President as a crazy man, and we are shocked to discover he is governing as a crazy man?